Europe’s economic boom has come to a sudden and unexpected halt. The rate of growth has fallen by two-thirds between the final quarter of 2017 and the first quarter of 2018.
Not entirely coincidentally, the UK economy has also thrown up a big disappointment for the first few months of the year. It’s a mark of the insularity of UK-based economic soothsayers that they fail to connect the dots between the two disappointments.
As yet another reminder about the perils and futility of economic forecasting, crystal-ball gazers are scrambling to find explanations for these wholly unanticipated slowdowns. The growth slump has come out of the blue and nobody has much of an idea why.
Bad weather and its impact on construction is a favourite excuse but it is curious that nobody seems to have factored that into their guesses: that the winter was a spectacularly poor one is something that I think we all knew.
Although the US economy recorded a reasonable, if unspectacular 2.3 per cent expansion in the first quarter, every economic commentator is starting to worry.
Indicators
Several favourite indicators are starting to flash amber, if not red; there is lots of talk about the age of the current US expansion and how a recession is, if history is any guide, somehow due.
Chief among those indicators is the behaviour of the money markets. Analysts are staring at charts of the gap between short-term interest rates and bond yields. When that gap is very small, as it is now, it has tended to predict, if somewhat imperfectly, that economic trouble lies ahead.
As recently as the end of last year, it was commonplace to read about the unexpected boom of the world economy. The biggest surprise over the previous year or two had been the sudden resurgence of Europe. Perhaps the single best rule of thumb for economic forecasting is to expect to be surprised.
In that vein, an abrupt slowdown is no surprise. Economic forecasting really is a waste of time.
Most analysts seem to think that the recent collapse in Europe’s rate of growth is more a pause than a portent of outright recession. My own guess, for what it is worth, is that the sudden acceleration of growth through 2016 and 2017 was unsustainable and that we are witnessing a moderation to something like the European Union’s trend rate of growth.
That, of course, is disappointingly low. If trend growth is all that we can expect going forward that will be cold comfort for the still too many unemployed people in the EU.
Monetary stimulus
And it massively complicates the European Central Bank’s task of gradually removing the extraordinary monetary stimulus that it is still pursuing. Unlike the US, there is no hint of any meaningful uptick in European wage inflation which, if it continues, will mean no interest rate hikes for as far as the eye can see. Mortgage-holders and other borrowers can breathe a sigh of relief.
Stock markets are clearly worried about growth. European equities are slightly down on the year. Notwithstanding a truly spectacular first quarter for American corporate profitability, the US stock market can’t go up.
Why is trend growth so low? That’s the big but wholly unanswered question. There a lots of suspects but few convictions. Demography as well lack of investment (public and private) are often mentioned.
More speculatively I think that a much under-researched culprit is to be found in the sclerotic growth of cities. Economic geography is little understood but we know that countries can’t grow if cities are held back from developing.
We try to boost regional and rural growth but there is a curious ratio – almost a constant, it seems – between the size of a country’s capital city and its other cities and towns.
Businesses and people want to settle and work in cities. And if we hold back the rate of growth of the main city then the rest of the country also struggles. It is quite wrong to think we can boost regions while preventing the capital from growing.
Everywhere there is a problem with growth we see main cities being held back by lousy planning, lack of infrastructure and other bad policies.
In the UK, researchers may be looking in the wrong place for explanations for poor productivity growth: London is being held back, which means the rest of the country is as well. And so it goes on both sides of the Atlantic.
Planners who want Ireland’s smaller cities and towns to develop further would be well advised to stop putting the cart before the horse and think of ways to allow Dublin to grow at a faster rate.
Regional development, on this logic, thinks of the capital city as the engine of broader growth. Too many people seem to think that rural development must come at the expense of the capital. That’s upside-down thinking.
Economic forecasting is a waste of time. Public-sector resources would be better focused on ways to accelerate Dublin’s rate of growth and war-gaming what we will do when the next recession hits. We have no idea when it will happen but we can be sure it will.
